Welcome to Canada, land of minority stakes

For foreign investment managers that want a piece of the Canadian real estate market, there’s every chance they’ll have to accept non-control positions.

PERE visited Toronto this week for our inaugural Canadian roundtable to hear four executives discuss the country’s real estate. The consensus is that the country continues to be characterized by relative stability.

International capital looking for predictable, income-generating investments knows it can rely on the country’s solid macroeconomic indicators, particularly relative to those of its southern neighbor.

This money is approaching the market in increasing quantities. In 2009, foreign capital accounted for just $600 million of transactions in Canada, but as much as $6.5 billion in 2016, according to real estate transactions data provider Real Capital Analytics.

Transacting in this notoriously insular market, however, is proving difficult for international investors. Canadian-domiciled public pensions rank among some of the most sophisticated global institutional investors, with eight appearing on PERE’s Global Investor 50 ranking of the largest investors last year, second only to US-based investors in number. On their own turf, these investors have robust platforms with deep reaches into the country’s tenant and business communities. One roundtable participant said their track records and certainty of execution often tip the scales against foreigners in transactions.

And as long-term investors, Canadian institutions exit far less than other players, such as private equity real estate firms with limited-life vehicles, leading to a less liquid market than the US, where such firms are a real mainstay in the market. Nevertheless, Canadian pensions’ domestic transactions have been on the rise of late, with sales up from about $460 million in 2014 to $2.1 billion in just the first half of 2017, RCA says.

Critically, these Canadian investors’ continued interest in diversifying globally through exiting local interests and redeploying capital abroad offers opportunity for foreign capital to enter the market.

But there is one major caveat.

For the investment managers that cannot transact at significant scale – Blackstone’s Canadian industrial take-private, for example, came at a price tag out of reach for most of its peers – buying partial asset interests can be the best way to plant a flag in the country without stepping up the risk curve through development. But if investors choose this route, they must get comfortable with non-controlling stakes, as oftentimes this is what is available. Historically, and for obvious reasons, such a proposition is undesirable for managers that usually predicate their investments on the basis they control the exits.

One European investment manager who participated in PERE’s roundtable, for example, has long sought to enter Canada, but his group rarely takes minor stakes in assets. That executive conceded the firm will, however, likely buy an interest from an entrenched local player for a core office or retail asset this year to make its mark.

Foreign investment managers similar to this roundtable participant often work with Canadian investors abroad, leading to a higher level of comfort with potential partners in Canada. In some cases, the relationship goes both ways: foreign investors can share contacts, knowledge and even deals in Europe or Asia in exchange for Canadian investors doing the same in their home country. As these relationships intensify, more such dealings are in the offing.

This topic and other Canadian private real estate matters will be explored in PERE’s roundtable coverage published in May.

To contact the author, email meghan.m@peimedia.com.